TheChek News Flow

Asian Market Update: Australia unveils large downward revisions in budget projection, expects a decade of deficits; Japan threatens to boost its military presence around Senkaku in response to China ADIZ

***Observations/Insights*** - Australia's new coalition govt unveils a fiscal outlook that is much worse than the one projected by the prior Labor administration. Mid-year economic and fiscal outlook (MYEFO) now sees Australia remaining in deficit for a decade until FY23/24 vs prior expectation for return to surplus in FY16/17. Govt also affirmed its current year GDP forecast at 2.5% but cut FY14/15 growth outlook by 0.5pts to 2.5%. Separately, RBA's Dec policy meeting minutes reiterated the central bank is not closing off potential for further rate cuts but otherwise saw the policy board slightly less dovish than expected, pointing to signs of recovery in China and expectations of stronger growth in Australia in 2015. - In China, PBoC continued to hold off on injecting further liquidity into the system despite the disappointing HSBC flash manufacturing PMI released overnight, foreshadowing potentially slower economy in December. Also of note, China Banking Regulatory Commission (CBRC) was reported to avoid any increase in outstanding loans to local govt finance vehicles (LGFV) on signs of further strain in the financial system. Shibor rates rose for the 2nd consecutive session. - Japan was reported to look at increasing its military capacity in the disputed Senkaku islands area, having secured political support through meetings with ASEAN representatives and the US. Recall China foreign ministry officials have admonished some of Japan's recent rhetoric opposing Beijing declaration of an air defense identification zone in the region.

***Economic Data*** - (AU) RESERVE BANK OF AUSTRALIA (RBA) DEC MEETING MINUTES: Reiterates not closing off potential for further rate cuts - (AU) AUSTRALIA OCT CONFERENCE BOARD LEADING INDEX M/M: 0.5% V 0.3% PRIOR (second consecutive month increase) - (SG) SINGAPORE NOV ELECTRONIC EXPORTS Y/Y: -8.9% V -1.4% PRIOR; NON-OIL DOMESTIC EXPORTS M/M: -9.3% V +2.8%E; Y/Y: -8.8% V +4.5%E - (KR) SOUTH KOREA NOV PPI Y/Y: -0.9% V -1.4% PRIOR (14th consecutive decline)

***Fixed Income/Commodities/Currencies*** - (JP) Japan's MoF sells ¥1.10T in 20-year 1.6% (1.7% prior) JGBs; Avg yield: 1.586% v 1.514% prior; bid-to-cover: 4.49x v 4.75x prior - (CN) PBoC won't conduct open market operations (OMO) in today's session (4th consecutive session of halted operations) - (CN) Daily Shibor fixings: O/N: 3.4700% v 3.4470% prior (2nd consecutive rise); 1-week: 4.4590% v 4.3580% prior (2nd consecutive rise) - SPDR Gold Trust ETF daily holdings fall 8.7 tonnes to 818.9 tonnes (lowest since Jan 2009)

- USD is under modest pressure against the majors in the 11th hour before the Fed announcement - US treasury markets, slightly lower after strong industrial production figures on Monday, will digest Tuesday's CPI data before turning to the FOMC decision on Wednesday. USD/JPY is in a 20pip range, briefly falling below ¥103, while EUR/USD is also up about 20pips above $1.3720. AUD/USD continues to defy the USD-dominated trend and also no longer correlates to general risk-appetite on display in US equities. The aussie fell below $0.8930 on Moody's warning over Australia and was unable to sustain the gains after slightly less dovish than expected RBA policy meeting minutes. NZD also remained a relative outperformer, rising over 30pips from the lows above $0.8280 on upbeat fiscal assessment from Fin Min English.

***Speakers/Political/In the Papers*** - (CN) China Banking Regulatory Commission (CBRC) reiterates banks not to rise outstanding loans to LGFV; To study policies for financial institutions - Chinese press - (CN) China to implement rail pricing reform as early as 2014 - Chinese press - (CN) China Hebei Province Party Secy: to cut steel capacity even it harms provincial GDP - Xinhua - (CN) China State Administration of Foreign Exchange (SAFE) found fake re-export transactions for over $2.5B by end of Nov - Chinese press

- (AU) AUSTRALIA MID-YEAR ECONOMIC AND FISCAL OUTLOOK (MYEFO): Affirms FY13/14 GDP forecast at 2.5%, Cuts FY14/15 GDP target to 2.5% v 3.0% prior in Aug - (AU) Moody's: Australia Mid-Year Economic and Fiscal Outlook (MYEFO) debt projections worse than expected; Govt's GDP revisions, larger deficit forecasts clearly credit negative, but do not change Stable outlook - (AU) Australia PM Abbott: Australia is facing a decade of budget deficits - (AU) Australia Treasurer Hockey: We will fix the budget and deliver a stronger economy - press conf from the National Press Club - (AU) RBA Dep Gov Debelle: Basel III liquidity rules to make it more costly for banks to provide to customers deposit accounts with less than 30 days to maturity - press conf - (NZ) New Zealand Fin Min English: New Zealand Treasury sees GDP growth to peak at 3.6% in 2015 - press conf

- (JP) BoJ Gov Kuroda suggests Japan is half-way there on inflation target; States that Japan is halfway there on inflation target, but there is a long way to go; Initial inflation reflected a depreciated currency, this has now changed - FT - (JP) Japan Fin Min Aso: Will work to maintain FY14 new bond issuances below FY13 level - financial press - (JP) Japan releases national security strategy and defense plans: to consider increasing military presence around disputed Senkaku island territories - financial press - (JP) Japan Chief Cabinet Sec Suga: Collective defense an issue for next fiscal year onwards - (JP) Japan PM Abe cabinet approval rating declines by 9.3 points to 47.4% - Sankei News - (JP) Japan Center for Economic Research (JCER): Japan may have to raise sales tax as high as 19% by FY25 to deal with declines in capital stock, population, and social spending for the elderly - Nikkei

- (KR) South Korea President Park: domestic economy shows signs of recovery - (KR) South Korea likely to maintain 2014 GDP forecast at 3.9% - financial press citing ministry official

***Equities*** Market Snapshot (as of 04:30 GMT): - Nikkei225 +0.7%, S&P/ASX flat, Kospi +0.2%, Shanghai Composite -0.6%, Hang Seng +0.3%, Mar S&P500 flat at 1,779, Feb gold -0.2% at $1,242, Jan crude oil -0.1% at $97.35/brl

US markets: - KFN: KKR to Acquire KKR Financial Holdings for 0.51 shares per share, in a deal worth $2.6B; +28.6% afterhours - RICK: Reports Q4 $0.27 v $0.31 y/y, R$28.0M v $23.9M y/y; +12.1% afterhours - ECYT: Preclinical Data Support Endocyte's Folate Receptor-Targeted Small Molecule Drug Conjugates for Treatment of Triple Negative Breast CancerResults for Folate Receptor-Targeted SMDCs Presented at the 2013 CTRC-AACR San Antonio Breast Cancer Symposium; +3.1% afterhours - BA: *RAISES DIVIDEND 50% TO $0.73 FROM $0.485 (implied yield 2.2%); AUTHORIZES REPURCHASE PROGRAM FOR $10B (about 10% of market cap); +1.9% afterhours - BMR: Raises quarterly dividend by 6.4% to $0.25/shr from $0.235/shr; +0.3% afterhours - HXL: Guides FY14 $2.00-2.12 v $2.11e, Rev $1.80-1.88B v $1.84Be; -0.5% afterhours - TRGT: Announces Negative Top-Line Results from Phase 2b Clinical Trial of TC-5619 in Schizophrenia; -31.8% afterhours

Notable movers by sector: - Consumer discretionary: Linmark Group 915.HK -5.4% (H1 results) - Consumer staples: Ruralco RHL.AU -2.2% (institutional placement) - Industrials: PanAsialum Holdings 2078.HK +1.2% (FY13 results); Xinjiang Beixin Road & Bridge Group 002307.CN +1.4% (awarded contract); Huayi Electric 600290.CN +2.5% (enters JV); STX Offshore & Shipbuilding 067250.KR -4.1% (issues new shares); Daewoo Shipbuilding & Marine 042660.KR +2.8% (awarded order); Orica Ltd ORI.AU -1.0% (S&P downgrade) - Materials: Jiangsu Sopo Chemical 600746.CN +2.9%, Jiangsu Hengshun Vinegar Industry 600305.CN +1.7% (City of Zhenjiang plans for free trade zone trial) - Healthcare: Guilin Layn Natural Ingredients 002166.CN +3.6%, Shenzhen Neptunus Bioengineering 000078.CN +2.8%, Shandong Lukang Pharma 600789.CN +4.4% (Chinese press starts to cover H7N9 story overnight) - Technology: Great Wall Technology 74.HK +34.8% (rumors on buyout) - Utilities: Envestra ENV.AU -0.9% (merger agreement); TEPCO 9501.JP +1.3% (enters agreement with lenders) - Energy: AWE AWE.AU -3.8% (drilling update); Korea Gas 036460.KR -6.0% (raises FY13 net loss)

After Hours Summary: RICK +12.5%, HXL -0.5% following earnings/guidance

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings: RICK +12.5%

Companies trading higher in after hours in reaction to news: KFN +30.1% (to be acquired by KKR & Co (KKR) for $2.6 bln in an all-equity transaction; equates to $12.79 per share of KFN based on KKR's Dec 16, 2013 closing price), DEJ +18.3% (signed $27.5 mln Letter of Intent with Singapore based energy company), ECYT +3.1% (announced preclinical data suggesting the company's folate receptor-targeted SMDCs may provide a possible new treatment alternative for folate receptor expressing triple negative breast cancer (TNBC) patients.), WMB +2.5% (Corvex Management disclosed a 5.28% stake; seeks to add two members to the Board of Directors), THRX +2.1% (disclosed positive results from a Glaxo Group Limited (GSK) Phase 3b efficacy and safety study of umeclidinium), BA +1.6% (announced $10 bln share repurchase; raised dividend 50% to $0.73 per share)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings: HXL -0.5%

Companies trading lower in after hours in reaction to news: TRGT -31.9% (announced negative top-line results from Phase 2b clinical trial of TC-5619 in schizophrenia), SPPI -2.1% (announced offering of $100 mln of convertible notes), OXBT -1.8% (filed to delay filing of Form 10-Q)

Closing Market Summary: Russell 2000 Leads Stocks Higher

The S&P 500 settled higher by 0.6%, snapping its four-day losing streak. Despite today's gain, the benchmark index remains lower by 1.1% in December.

The bulk of today's advance occurred shortly after the open as the Dow, Nasdaq, and S&P 500 notched their highs during the initial 30 minutes. Small-caps were a notable exception as the Russell 2000 (+1.2%) climbed throughout the day, trimming its month-to-date loss to 2.0%.

Nine of ten sectors registered gains with cyclical groups maintaining their lead throughout the session. The energy sector (+1.0%) displayed strength from the open after its largest component, Exxon Mobil (XOM 97.22, +1.91), was upgraded to ‘Buy' from ‘Neutral' at Goldman Sachs. Crude oil, which added 0.9% to $97.47/bbl, also played a part in the sector's strength.

Elsewhere, the industrial sector (+1.0%) assumed the lead in afternoon trade as defense contractors and transports rallied. The PHLX Defense Index settled higher by 1.2% while the Dow Jones Transportation Average climbed 0.9%. Although heavily-weighted financials (+0.6%) and health care (+0.2%) were a bit tentative in today's advance, the largest S&P 500 sector, technology(+1.0%) picked up the slack. The sector received support from chipmakers after Avago (AVGO 50.10, +4.45) agreed to acquire LSI Logic (LSI 10.96, +3.05) for $11.15 per share. The broader PHLX Semiconductor Index ended higher by 1.3%.

Even though equities registered solid gains, all ten sectors remain in the red for the month. Countercyclical consumer staples, health care, telecom services, and utilities are down between 1.0% and 2.7% in December while losses among cyclical groups are limited to no more than 1.2% (consumerdiscretionary and financials). Despite today's advance, the CBOE Volatility Index (VIX 16.06, +0.30) climbed for the fourth session in a row, ending at a two-month high.

Treasuries registered modest losses as the 10-yr yield ticked up one basis point to 2.88%. Today's participation was on the light side as only 669 million shares changed hands on the floor of the New York Stock Exchange. On the economic front, revised productivity data for the third quarter showed an increase of 3.0%, which was above the 2.7% increase that had been expected by the consensus. Unit labor costs for the third quarter were revised lower to reflect a decrease of 1.4% (from -0.6%). The consensus expected the reading to reflect a decrease of 1.3%. Separately, the Empire Manufacturing Survey for December registered a reading of 1.0, which was up from the prior month's reading of -2.2. However, the reading came in below the 5.0 expected by the consensus.

November industrial production increased 1.1% while the consensus expected an uptick of 0.4%. Meanwhile, capacity utilization hit 79.0%, which was better than the 78.4% expected by the consensus.

Lastly, the October net long-term TIC flows report reflected an inflow of $25.5 billion into U.S. denominated assets. This followed the prior month's $25.5 billion inflow. Tomorrow, November CPI, core CPI, and the third quarter current account balance will all be reported at 8:30 ET. Separately, the NAHB Housing Market Index for December will be released at 10:00 ET. o Nasdaq +33.5% YTD o Russell 2000 +31.9% YTD o S&P 500 +25.3% YTD o DJIA +21.2% YTD